Not a rosy picture for Software-as-a-Service companies

Unlike traditional customer relationship management (CRM) software that needs to be installed on individual systems, SaaS works on a software distribution model where third party providers host applications that are made available to customers over the internet.

BENGALURU: The software-as-a-service, or SaaS, space has been a darling of investors for over a decade now. It was pegged as the next big startup opportunity and investors made a beeline, funneling in at least $850 million into more than 125 ventures in the last 5 years.

But despite the promise, fewer than one-third of these startups have progressed to a monthly recurring revenue of Rs 50 lakh — a benchmark considered healthy for an Indian SaaS company to merit consideration for Series-A funding.

SaaS as an industry gained global momentum in early 2000 for its ability to be centrally hosted. Unlike traditional customer relationship management (CRM) software that needs to be installed on individual systems, SaaS works on a software distribution model where third party providers host applications that are made available to customers over the internet.

When US-based CRM SaaS provider Salesforce.com listed for an initial public offering within five years of being founded, it was evident that SaaS was the next big thing. What made Salesforce. com so popular among enterprises was its ability to allow businesses to access and manage critical customer information at midnight or weekends, and in multiple languages from multiple devices.

Around the same time, California-headquartered Zoho, a SaaS service provider, started expanding its customer base in the US while most of its sales team operated from Chennai — among the earliest Indian SaaS startups to venture beyond the domestic markets.

For a subscription-based model like SaaS, revenue generation is calculated using a metric called monthly recurring revenue (MRR), where a monthly revenue is fixed for say a period of one year. Market experts, however, say Indian SaaS companies have not been able to focus on building products that address essential market needs, preventing them from adding beyond the first set of clients.

IDG Ventures India chairman said Sudhir Sethi that of the 125 SaaS companies that have been funded by venture capital firms in the last five years, only 38 have progressed to an MRR of more than Rs 50 lakh.

“Many SaaS companies face scaling issues due to the Indian market focus being high and their inability to scale to the US markets. The only way to scale rapidly is to scale beyond India in the early stage of the lifecycle,” Sethi said.

Agrees Girish Matrubootham, the chief executive of Freshdesk. The Chennai-based company has customers in the US, the UK, Australia and Germany and is one of India’s highest-valued SaaS startups with an estimated worth of about $500 million (about Rs 3,300 crore). "It is extremely important for a SaaS company to be able to sell online across geographies," he said.

Matrubootham, who has also invested in various SaaS startups including Zarget and Betaout, said he meets several entrepreneurs trying to run a SaaS business by selling software to other businesses they know by virtue of their social circle. "Understanding your business model and then performing all activities that lead to a repeatable cycle is the key to generating revenue in a SaaS model," he said. Many SaaS startups in India fail to generate a flywheel effect, said Suresh Sambandam, founder of Chennai-based SaaS startup KiSSFLOW.

Sambandam, who is also a member of software product think-tank iSPIRT, said that just as a flywheel requires effort to be set in motion but is difficult to stop once it gains momentum, for a SaaS business it is essential to find a deeply rooted sales engine that will keep generating revenue.